Reputation: The Inside Story

Even among industry insiders, company reputations are hard-earned and subject to change. Rating Research's (RRC) second annual Reputation Strength Study of the Pharmaceutical Industry surveyed financial analysts and industry senior executives to see how 19 companies stack up against each other and to see how their overall reputations changed from last year. (See "More than Numbers.")

On one hand, the industry sees itself quite favorably. On the critical behavioral measure "perception as an excellent company," industry executives expressed positive opinions about the vast majority of rated companies. Financial analysts gave even more favorable reviews than executives on half of the surveyed companies. However, the industry has one significant vulnerability: its low scores on the measure "personally willing to support in times of controversy." The essence of the measure that asked them how willing they would be to support the company in a time of crisis is whether executives would give a particular company the proverbial "benefit of the doubt" during tough times. Even Pfizer, the company with the strongest score in the measure, attracted the support of less than half the executives surveyed. It seems clear that the issue of developing greater support-indeed trust-needs to be a central focus for the industry going forward.

Overall Reputation Ranking

And, given the potentially turbulent times ahead, RRC believes that the industry's key players will benefit by treating overall reputation as a risk factor that they must manage. Reputation, and the intangible characteristics that constitute it, can be a vital asset-or a worrisome liability-as the industry confronts its challenges.

The Big Picture

For a snapshot of the industry, RRC mapped each company into a quadrant matrix according to its Reputation Strength Score (RSS) and its "familiarity." (See "Outlook Matrix," page 42.) An RSS is the sum of executive responses to 37 reputation components, weighted by their respective importance to overall corporate reputation. Familiarity measures the extent to which a company's public relations, advertising, and product messages have been received by those individuals who are aware of the company. RRC then labeled the four quadrants, from highest reputation to lowest, "leaders," "next generation, "traditional," and "challenged." The subset graphic in the chart illustrates how reputation changes-both good and bad-from 2002 to 2003 moved seven companies from one quadrant to another.

More Than Numbers

This year, Merck, Pfizer, and Johnson & Johnson (J&J) dominate the "leaders" quadrant, consolidating their leadership positions. Eli Lilly and Novartis both moved into the Leaders group from their positions last year in the "next generation" and "traditional" quadrants, respectively. GlaxoSmithKline also moved squarely into the leadership quadrant from its borderline position in 2002.

Bayer moved out of the Leaders category, but the strength of its reputation kept it within striking distance of regaining that position. Bristol-Myers Squibb, after a string of issues relating to questionable patent protection strategies and dubious wholesale inventory practices, among others, also lost ground, moving from "leaders" to "traditional." On the positive side, Roche improved its reputation strength the most, and Novartis and AstraZeneca also made solid gains.

Outlook Matrix and On The Move

Most newcomers to the 2003 rating process fall into the "challenged" group. But the challenges facing Alcon, Allergan, and Forest Laboratories involve developing a positive and distinct reputation rather than having to correct a negative one. Forest, in particular, garnered significant "neutral" responses from industry executives. Amgen began its rating history this year in the "next generation" quadran

The Process

RRC's reputation rating process began by assessing two criteria. Based on a battery of 37 reputation components, subject to an in-depth analytic process, the first criterion explores the dimensions that emerge as most critical to driving reputation in the pharmaceutical industry. Eight dimensions emerged during last year's analysis, but this year's produced nine reputation dimensions. (See "Reputation Structure," page 44.) In descending order of importance they are:

Compared with Last Year

• competitiveness

• ethical behavior

• CEO leadership

• financial stability

• manufacturing process

• social responsibility

• employee retention

• marketing effectiveness

• charitable support

(See ranking charts throughout article.)

Each of those dimensions is made up of multiple components. Competitiveness, the most important, includes intangible characteristics such as management team talent, company innovation, sufficient investment in R&D, sales force effectiveness, and the ability to attract high-quality employees, among others. Given the issues the pharmaceutical industry is dealing with, it is not surprising that "ethical behavior" is the second most important dimension this year. It captures perceptions on values such as:

How They Rate

• trustworthiness

• adherence to ethical business practices

• transparency of financial disclosure

(As a result of the increasing importance and scrutiny of ethical behavior across industries, RRC treats this area in more depth through its comprehensive Ethics Reputation Rating process. Those ratings and supporting information will be released in the near future.)

The third dimension, "CEO leadership" measures the ability of companies' executive managers. High performing companies are driven by high performing executives. This reputation dimension captures components such as clarity of the company's strategic direction, strength of corporate governance, its ability to form effective strategic alliances, and the effectiveness of the CEO's leadership.

Reputation Structure

On another level, the rating process examines five key behavioral and perceptual measures that capture, at a summary level, the strength of the "reputation reservoir" a company has established. They include respondents' perceptions of the rated companies on the following measures:

• personally willing to invest in

• personally willing to support in times of controversy

• customers willing to pay a premium for its products and services

• personally willing to recommend as a place to work

• perceiving the company as "excellent" overall

Top-Line Findings

Generally, the strong performers from 2002 held their ground in 2003, reinforcing the reputation experts' notion that a carefully built and managed reputation will withstand the inevitable crisis or controversy. Pfizer and Merck tied for the highest "reputation strength score," followed closely by J&J. (See "Overall Reputation Rating," page 41.) All three top companies garnered exceptional scores across all nine dimensions. J&J and Pfizer ranked highest on "CEO leadership," Merck topped the "ethical behavior" list, and Merck and Pfizer tied for first in "competitiveness" (with J&J scoring fourth in that dimension). In discussing J&J, one executive said: "I think they are an excellent company and have their customer and patient base in mind, they look to the future." Another commented on Merck's ethics, noting, they "insist on everything being right."

Competitiveness and CEO Leadership

The financial analysts favored top performers like Pfizer and J&J, as well as Amgen and Eli Lilly. Pfizer, in particular, received strong support from analysts this year, generating favorable comments about its pipeline, management, and aggressive sales and marketing efforts. As one analyst succinctly put it, "Pfizer is the best."

Amgen also warrants recognition in light of its strong performance in its first year in the reputation rating process. The company placed third in the dimensions of "competitiveness," "social responsibility," and "employee retention." It also captured a fifth-place ranking in "financial stability" and "manufacturing process." Executives are impressed with Amgen's innovation and view the company as "one of the best places to work in the biotech and pharmaceutical industries."

Financial Stability and Manufacturing Process

The "most improved" mention goes to Roche. Its overall RSS increased by 11 points, representing improved perception in several of the 37 components measured. Wyeth, Abbott Laboratories, and AstraZeneca also improved their RSS performance. At the other end of the spectrum, Bristol-Myers Squibb dropped most drastically, from an RSS ranking of eight last year to 17th this year. (See "Compared with Last Year," page 42.)

Last year, analysts scored Bristol-Myers Squibb in the top group, with 77 percent support in the "personally willing to invest in" measure. But this year, support for that measure evaporated, dropping precipitously to 10 percent. More forgiving than analysts, some industry executives view Bristol-Myers Squibb's recent events as "missteps" from which a recovery is possible. As one executive noted, "The company will have a future to look forward to."

A Deeper Look

Understanding the relative importance and weighted components that comprise each dimension is extremely important, particularly to companies' understanding of their own reputational strengths and weaknesses. With these insights, a company can create an effective corporate communications strategy that reinforces its perceived strengths to key constituencies, be it the industry, customers or others. At the same time, in instances where a perceived weakness indicates a systemic problem, companies may want to implement fundamental changes.

Social Responsibility and Employee Retention

As noted, "competitiveness" is the number-one reputation driver among this year's criteria. The dimension is composed of several detailed reputation components, and a company often performs better on some than on others. For instance, although Amgen, Merck, and Pfizer, lead in the dimension, they differ in specific components and areas in which they can improve. Amgen ranked 13th in "has a loyal customer base," and Merck ranked ninth in "offers innovative products and services."

Merck, Pfizer, and J&J emerge as "ethical behavior" leaders, performing strongly on core components such as "trustworthiness" and "transparency of financial disclosure," while BMS experienced a major decline on this dimension from 2002. Clearly, the company has reputational repair work ahead of it. As one analyst said: "BMS had fallen from grace and lost prestige and standing among its competitors and the financial community."

"CEO leadership," new to the 2003 study, emerged as the third most important dimension. The top-ranked companies in that category include the familiar threesome of J&J, Pfizer, and Merck, with one executive commenting that: "Merck is the best managed company in the world." Schering-Plough and Forest Labs, ranking at the bottom of the study, have leadership challenges to address. Neither company performed strongly on any of the five components comprising the dimension. Schering-Plough may see improvement on the dimension next year as a result of taking on a new CEO, Fred Hassan, who has a strong leadership reputation in the industry.

Marketing Effectiveness and Charitable Support

Another interesting aspect of the leadership dimension is the opinion of financial analysts on the component "CEO provides effective leadership." There, Pfizer ranks first, followed by J&J and Genentech. Those ranking last were Bayer, Bristol-Myers Squibb, and Schering-Plough.

Look to the Future

Sound leadership on the part of the major pharmaceutical companies will play a key role in developing higher levels of trust in the industry-a valuable commodity as it faces a barrage of challenges. Professor Stephen A. Greyser, of Harvard Business School and a RRC board director, maintains that companies must establish, nurture, and preserve their reputations, noting that: "Recent events have reminded us to look behind the numbers and at the intrinsic nature of a corporation. Corporate reputation should be considered as much more than simply a brand emblem in the marketplace. Rather, corporate reputation is a window to the fundamental character of a company and its leaders and, as such, is relevant to all stakeholders."